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How to make a Term sheet

A term sheet is a document that sets out the terms and conditions under which an investor will invest in a business. This is usually a startup company. It outlines the main terms and conditions of the investment deal and guides the preparation of the final agreement.

Outline the key financial terms and other terms of a proposed investment using this term sheet template. Investors use a term sheet as a basis for drafting investment documents. The term sheet is not intended to be legally binding, with the exception of certain clauses, commonly those dealing with confidentiality, exclusivity and sometimes costs.

It is crucial that the founders of a company understand what they're signing up to beyond just the valuation and investment amount, as they will have to live with these terms and in certain cases, convince their fellow shareholders to accept them also.

Use this term sheet:

  • when you are looking to make a seed investment in a business

This term sheet covers:

  • lead investor details
  • conditions of investment
  • capital structure
  • liquidation preference
  • information rights
  • management rights

A term sheet lays the groundwork for a negotiation and ensures that the parties involved in the transaction agree on the most important aspects of the deal. By setting out the terms of the future agreement, the term sheet reduces the likelihood of disputes further down the line.

A 'seed investment' is an early-stage investment, that usually funds the first operations of a business, such as research and development. It's the invested capital that supports the business until it can generate cash, or until it is ready for further investment. Seed investment is quite high-risk, so this type of funding is often compensated with the investor obtaining an equity stake in the business.

The lead investor is the investor that contributes to the most significant portion of the investment. They play an important part in the development of a business, for it is usually they who sign the term sheet and engage in the seed investment.

Lead investors can be family members or friends of the business founder, high net individuals (ie angel investors) or venture capital investors.

Before deciding to invest, investors should consider factors such as:

  • information about the business (eg business plan, management team, market position, competition)
  • the level of control they'll have over the business and over the investment itself
  • the way they can get their money back in the event the company is sold or closes down

Ask a lawyer for:

  • advice if any of the parties are based outside of England, Wales or Scotland

This term sheet is governed by the law of England and Wales or the law of Scotland.

Other names for Term sheet

Investor agreement, Termsheet.